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Retirement Planning, Financial Freedom, Fee-Based Financial AdviserWed, 19 Dec 2018 09:17:09 +0000en-UShourly1https://wordpress.org/?v=5.0.1https://www.sgmoneymatters.com/wp-content/uploads/2018/05/favicon-100x100.jpgSGMoneyMattershttps://www.sgmoneymatters.com
3232140812228What is an Accredited Investorhttp://feedproxy.google.com/~r/SingaporeMoneyMatters/~3/-IRZUstksY8/
https://www.sgmoneymatters.com/what-is-accredited-investor/#respondWed, 19 Dec 2018 09:00:16 +0000https://www.sgmoneymatters.com/news/?p=1265When you deal with investment products, you may stumble upon a term “Accredited Investor”. There are generally three types of investors in the market: Retail Investors Accredited Investors Institutional Investors Accredited investors (AI) are often High Networth Individuals. They have access to some of the untraditional or sophisticated investment products which are out of touch […]

]]>When you deal with investment products, you may stumble upon a term “Accredited Investor”. There are generally three types of investors in the market:

Retail Investors

Accredited Investors

Institutional Investors

Accredited investors (AI) are often High Networth Individuals. They have access to some of the untraditional or sophisticated investment products which are out of touch by the retail investors.

This article will briefly explain

Who qualifies as an Accredited Investor?

How to qualify?

Are products for Accredited Investors good?

Why some products are sold for Accredited Investor only

The term originates from the English word ‘accredited’ which literally means someone who has been given special authority or sanction if they meet certain recognized standards. Accredited investors are most popular for purchasing securities which are not “regulated”.

There are two misconceptions of Accredited Investor products:

Accredited Investor investment products are superior because they are scarce, and for the high net worth people only.

You should not declare yourself as an accredited investor even if you qualify because you will be sold toxin products and you enjoy no regulation protection

Both concepts are wrong. Accredited Investor products are neither good nor bad. You need to scrutinize them just like many other products. For example,

Vanguard’s Index funds (the most popular and one of the largest passive investing strategies) are considered Accredited Investor products just because they don’t want to go through a complex and costly process such as regulatory filings and capital outlay in Singapore

On contrary, Lehman’s Minibond, the famous toxin products were sold as a retail product where any Mom-and-Pop can buy.

Types of Accredited Investor

As defined in Section 4A of the Securities and Futures Act (Chapter 289), there are two main types of accredited investors

An individual

If you qualify any of the following:

(A) Your net personal assets exceed in value S$2 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount; or

(B) Your income in the preceding 12 months is not less than $300,000 (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;

As an asset rich, cash poor nation, many Singaporeans used to qualify themselves using their properties. With effect from December 2018, an individual’s primary residence (Registered Residential Address) will only account for up to S$1 million of the individual’s net personal assets, after deducting outstanding amounts e.g. mortgage loan. For example:

A deposit (e.g. Fixed Deposit) as defined in section 4B of the Banking Act or

An investment product (e.g. Stocks, Bonds, CIS, Options, Life Policy) as defined in section 2(1) of the Financial Advisers Act or

Any other asset (e.g. Gold) as may be prescribed by regulations made under section 341

A corporation

A company can also be qualified as an accredited investor if its net assets exceeding $10 million in value (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe, in place of the first amount, as determined by

(A) the most recent audited balance-sheet of the corporation; or

(B) where the corporation is not required to prepare audited accounts regularly, a balance-sheet of the corporation certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance sheet which date shall be within the preceding 12 months;

Accredited investor can only be the trustee of such trust as the Authority may prescribe, when acting in that capacity; or such other person as the Authority may prescribe.

How to qualify as an Accredited Investor

By net personal assets

You can prove that your net personal assets

Using property

Property title deed

Property valuation report less than 6 months old from recognized valuers

Using Owner’s Equity

Latest audited annual accounting report of the company (audit report by the Big Fours and/or recognized registered audit company in the country)

Using Personal Investment/Savings

Latest investment portfolio statement (as at market value)

Latest bank statement

By Income

To prove income in the preceding 12 months is not less than S$300,000 (or its equivalent in a foreign currency)

For Singapore Citizen and Permanent Residents

Last 12 months’ original computerized salary slip or

Latest Notice of Assessment

Last 12 months’ CPF contribution statement

For foreigners, in addition to the above documents

A copy of employment pass

Passport

If you have any question, simply leave your comment or contact me via the form below.

]]>https://www.sgmoneymatters.com/what-is-accredited-investor/feed/01265https://www.sgmoneymatters.com/what-is-accredited-investor/How to Invest After US-China Trade War Trucehttp://feedproxy.google.com/~r/SingaporeMoneyMatters/~3/KAXQ1MYk6p8/
https://www.sgmoneymatters.com/how-to-invest-us-china-trade-war-truce/#commentsTue, 11 Dec 2018 08:40:41 +0000https://www.sgmoneymatters.com/?p=133972018 was a tough year for investors. Almost all the investments markets (stocks, bonds and commodities) are in a bearish mode. US-China Trade War is not only a war between US and China, it affects all of us. We haven’t seen this for a long time, not since the 2015 China Stockmarket crash, which triggered global […]

]]>2018 was a tough year for investors. Almost all the investments markets (stocks, bonds and commodities) are in a bearish mode. US-China Trade War is not only a war between US and China, it affects all of us.

If you are an investor, what should you do now? Should you be optimistic or pessimistic?

Don’t Fall into Retail Investors’ Trap

I have a personal indicator of where the market is turning, that is from my clients. When more of my clients “check in” and ask the performance of the portfolio, it is a sign that retail investors are out of the market. Why?

A typical investor’s behaviour is as the chart below. Generally, when the markets are near the top, retail investors get excited and want to buy more. But when the market is bottomed, retail investors are mostly on the defensive side.

And I can testify that with all the recent crashes.

BitCoin Bubble: at the end of 2017, many people asked me how to buy “Bitcoins”, and boom, the Bitcoin hit the record high in December 2017 and collapsed and lost 80% in the past year.

Tech Bubble: At the beginning of 2018, Fintech and Robots dominated the global headlines. I have numerous conversations with friends and clients about the overvaluation of Apple, Facebook, Tencent, Alibaba, Tesla, etc. I told them that they are late in the game, but few are convinced. Boom, more than 20% was wiped out in these “future” technology stocks.

US Stock Market Crash: In the mid of 2018, I was again asked by many people how to buy “US Stocks”, and boom, the S&P 500 hit record high in October and it collapsed 8% as of today.

Generally, when the market dropped a bit like the first half of the year, a lot of retail investors will rush in due to the “Achoring Effect”.

But now, I started to get enquiries of if they should stop investing or reduce their monthly contribution. To me, that is a good sign. Think about it, if you lose 10% investment, you probably want to average down, or monitor, or do something about your investment. But if you lost more than 30%, you probably will just leave it there and “hope” it will recover.

Volatility Is the New Norm

In the past few days, the market swung up and down 1% to 3%. That makes a lot of investors unsettled. We need to understand that the episodic volatility is the norm for markets. What happened in 2017 was a historical exception.

In an average year, investors experienced more than 60 days of 1%+S&P 500 price moves, versus the 8 such days in 2017.

US-China Truce is a Temporary Stop, Not The End of the War

China has been tougher than what Donald Trump imagined. It is probably the toughest financial fight they encounter in the past 100 years. The US always had their way to control the world through their financial system. The gold standard, the USD Oil relationship, the Quantitative Easing. Nobody in the world had the financial muscle to defy the US in the past, but China is here to strike the balance.

When the US stock market is good, Trump can be hard on the trade war. As soon as the market weakens (like now), he is forced to be softer. The possible things may happen in 2019

The pace of rate hike will slow down or even reverse

More “unconventional” off-the-market tactics will be used. (such as what we have mentioned earlier)

The world will be more divided and forced to choose a side (take a closer look out to countries like Korea, Japan and even Europe)

Focus on Preserving Wealth, but Refrain from Leaving the Market

At the beginning I told you that the market today is like what it is in 2015, You can review this article written by me in 2015 how we should position our investment portfolio in this kind of markets.

“It is dangerous taking a position; it is equally dangerous doing nothing.”

Leave Your Ammo for the Right Asset Classes

If you look at the performance of GMC portfolio, you can see it is still in good shape despite all the lost in Asian markets this year. Why? Because I continued adopting a systematic approach to investing.

My outrageous belief for 2019 is that the source of investment return will be from Asia. But before we jump into the conclusion and discuss the investment strategy, we should let the market leads our way.

If you are keen to know more about GMC Investment Portfolio, you can submit your request using the form below for a non-obligatory investment discovery meeting. You can also leave your comment below if you have any question.

]]>https://www.sgmoneymatters.com/how-to-invest-us-china-trade-war-truce/feed/113397https://www.sgmoneymatters.com/how-to-invest-us-china-trade-war-truce/How to Invest in Japan Real Estate as a Foreignerhttp://feedproxy.google.com/~r/SingaporeMoneyMatters/~3/00nozhmhYlU/
https://www.sgmoneymatters.com/invest-japan-real-estate-foreigner/#respondSun, 02 Dec 2018 05:55:54 +0000https://www.sgmoneymatters.com/?p=13350Japan’s real-estate property investment market, as you may or may not know, is Asia-Pacific’s biggest market, and the second biggest global market in the world. But it is difficult for foreigners to invest in Japan’s real estate. Properties in Japan are among the cheapest in the developed world, particularly in the lower end of the market, […]

]]>Japan’s real-estate property investment market, as you may or may not know, is Asia-Pacific’s biggest market, and the second biggest global market in the world. But it is difficult for foreigners to invest in Japan’s real estate.

Properties in Japan are among the cheapest in the developed world, particularly in the lower end of the market, the property transactions are extremely well documented, with an official paper trail that stretches out to the moon and back – and the purchase and management is always legal, extremely well regulated, and with full recourse for both buyers and sellers.

Japan’s Real Estate should be property investors’ paradise because of its:

Invest in Japan’s Real Estate – Language and Culture Gap

For foreigners, however, this huge real-estate property investment arena can be quite difficult to operate in, for two main reasons.

The first is the language and cultural gap – the vast majority of professionals, corporate entities such as banks, government authorities and third-party service providers in Japan, are usually unable to provide services in any other language other than Japanese, and in many cases will outright refuse to work with anyone who isn’t native Japanese, even if they do speak, read and write the language. This is doubly true for properties outside the country’s two main metropolitan centres of Tokyo & Osaka, as well as a few other foreigner-rich locations such as Naha in Okinawa, which has many US army bases – Niseko ski village in Hokkaido – and similar examples.

And, while that obstacle can be surmounted by using companies like specialized investment companies, there’s a second huge problem which comes into play almost immediately after the first few cheap properties one manages to buy, which is financing.

Financing Is the Biggest Hurdle

This sad state of affairs isn’t due to any government restrictions on banks – far from it – there is nothing in Japanese law which prohibits banks from allowing non-resident foreigners to open bank accounts in Japan, take out loans and mortgages, or otherwise use banks’ financial services.

In fact, the government continuously declares and puts policies in place to make it easier for foreign investors to operate in the country. The issue stems from the simple fact stated above – that companies, big or small, in the land of the rising sun, are terrified of doing business with foreigners, due to the language and cultural gap – and this applies to banks as well.

Sure, they’ll quote other reasons, such as their “anti-money-laundering policies”, “shortage of English speaking staff” and so forth – and portions of those reasons are true – but the crux of the matter is that banks, like most businesses in the country, be they big or small, are extremely foreigner shy, to the point of complete panic.

And so, foreign investors capacity to invest is limited to whichever amount they are willing to or are able to allocate for cash purchases in Japan.

Even if they are willing to accept the extremely strict borrowing criteria that the few rare banks who are willing to lend to them, they are still subject to things like:

Restricted to only properties in the heart of Tokyo (which means even lower yields)

Zero diversity in their portfolio

High capital outlay which just doesn’t make any sense

Others will necessitate an extended existing income history in Japan, verifiable by tax return statements (which often doesn’t exist for most investors, who will claim all possible deductions on their cash-purchased properties, then sell those and recycle the funds into new acquisitions, in order to minimise their tax payable).

All of the above means that, non-resident foreigners who invest in Japan’s real-estate property market are almost exclusively cash-buyers – which, in turn, means that most of them only invest a fraction of what they’d be willing and happy to invest in the country, if only they could acquire the financing for it.

The New Trend of Financing

With the modern technology and global community such as Airbnb, crowdfunding, peer-to-peer lending, there may be a business opportunity for investors who may want to provide loans to these foreign buyers – those investors would most likely fit the following profile –

They must have a minimum of approximately 20,000 USD to offer investors as a loan – this is normally the cheapest – yet still rentable – property price tag in Japan at this point in time

They would probably have an interest in, or at least a passing acquaintance with Japan and its property market, and want to gain more portfolio exposure in this arena

They are not interested in investing this money in Japanese real-estate property directly on their own – either because they’re not interested in the hands-on management of such a portfolio, or because they already have such investments themselves and now wish to diversify their financial exposure – or for any other reason

They must be happy with a return of 4-6% in annual income on these loans – as most investors will not pay anything beyond that, for fear of entering negative gearing territory, should their properties become vacant, or rental income otherwise significantly reduced for any reason

They must be comfortable with the idea of owning the properties securing these loans, should the borrower default on their financing agreement

As for the terms of the loan itself – these will be entirely up for discussion between the lender and borrower. Most property buyers (the borrowers) would most likely be mainly interested in “standard” mortgage arrangements of 70-90% LTV, payable over a period of 10-25 years – whereas the lenders may be interested in shorter terms and different ratios – a negotiation will need to be held to find the sweet spot that suits both the lender and borrower.

Security, aside from the obvious – the property itself – could be further boosted via various checks & legal provisions drafted by the lender, or by choosing to lend only to investors who already have other properties in Japan, purchased in cash and paid in full prior to the new investment – which would serve to naturally screen potential borrowers even further. Lastly, a lender could, of course, choose to lend only to residents of their own country, to further enhance their recourse options in case of default.

The Demand for Financing Japan’s Real Estate Is Huge

A typical Japan property investment company, such as Nippon Tradings International, is normally approached at least two or three times a week by existing or potential clients who are interested in purchasing Japan real-estate investment properties via bank mortgages or other financing schemes.

You will be surprised to know that the Bank of China is one of those rare banks which will agree to lend funds for Japanese property purchases for non-resident foreigners, but only for those who are already doing business with them in other countries, and only for very specific property profiles.

Alternatives of Direct Japan Property Investment

Having said that, besides putting 100% to directly own a Japan property, you can gain exposure to Japan’s property market through Japan Real Estate Investment Trust (commonly known as J-REITs).

For example, below is a list of J-REIT ETF which you can invest in.

Although these ETFs are trading in Tokyo Stock Exchange, a foreigner has no problem to buy them through your stock brokers.

]]>https://www.sgmoneymatters.com/invest-japan-real-estate-foreigner/feed/013350https://www.sgmoneymatters.com/invest-japan-real-estate-foreigner/How to Invest Amid US-China Trade War as an Asian Investorhttp://feedproxy.google.com/~r/SingaporeMoneyMatters/~3/S-ofCpjkuBA/
https://www.sgmoneymatters.com/how-to-invest-us-china-trade-war/#commentsWed, 14 Nov 2018 05:19:29 +0000https://www.sgmoneymatters.com/?p=13279The 2018 US-China trade war is a game changer for the global investment markets. It is a once-in-a-decade investment opportunity that you have to seize. How can you grow your wealth instead of being a victim of the war between two global giants? This article will shed the light for you. But before we start, […]

]]>The 2018 US-China trade war is a game changer for the global investment markets. It is a once-in-a-decade investment opportunity that you have to seize.

How can you grow your wealth instead of being a victim of the war between two global giants? This article will shed the light for you. But before we start, I want you to think about this question: what investment decisions would you make, if you have Doraemon’s time machine and you can travel back in time?

As an Asian, you probably wanted to buy a private property in Singapore or Hong Kong because you “missed the boat”. Indeed, many new rich were created through property investment in Asia.

But do you know nearly 10 years after the global financial crisis, the US stock markets have run up nearly 300%? Now, what would be your choice?

There are many ways of investing, but most retail investors are misguided. They often derive the wrong conclusion due to the wrong reason. Things like “property price will always rise in the long run”, “I should buy Apple stocks because the iPhone is selling well”; or “I am very confident in Tesla will go up in the future because it produces the next generation cars”.

We hear this all the time. When you choose the right asset class or market, everything is right even if you are wrong.

I am writing this article because I want to help you understand how you should look at the global environment now, how you should relook at your investment portfolio and thesis.

If you are retiring in the next decade. You need to get this thing right. Because there is no time machine in real life. If you didn’t buy Asia property, US stocks or Bitcoin, you have already missed the boat. The most dangerous thing is to be blinded by the past performance of these assets and conclude that these assets will always go up.

I won’t go into the technical details, this article will focus on giving you a framework to work on to invest for your retirement in the next supercycle.

US-China Trade War: Why Do We Need to Care

Do you wish that you have bought this investment and held it for the past 10 years?

I bet you do.

Yes, it is the S&P 500 stocks, the “best 500 American companies”.

The truth is, when the market is good, everybody is a genius. I am not talking about the superior stock return of tech stocks or even the Bitcoin mania. Just throw a dart and pick a stock from S&P 500 list and you will likely gain 300% in the last decade.

There is a good reason why the US market had a stellar run. You may know the Quantitative Easing has printed trillions of dollars and this money has flooded the stock market. Yes, money flow boosts the market. But there are more structural reasons such as shares buyback and agency problem in America’s system. But I will leave it to another day’s discussion.

However, US-China Trade War is a game changer now. If you think about it, your personal assets are in three components.

Needless to say, it is likely that your stock portfolio suffered badly this year.

What it means is that if you don’t do anything in the next few years, your personal net worth will be shrinking. But before you take any action,

Know What You Believe Isn’t Always True

If you want to look at the situation clearly, you need to first learn to forget.

If a lie is repeated two times, people will still question it. If a lie is repeated thousands of times, people will take it as the gospel of truth. – Ivan Guan

In the investment world, most people just repeat what they hear without verifying if it is true and whether they are repeating it correctly.

If you are reading this article, I assume you are an English reader. Think about it, where do you get your daily financial information? You probably read Wall Street Journal or Bloomberg, listen to CNBC. And I bet at least 90% of the authors of the investing book that you read are Americans.

I am not saying that they are wrong, but is it common sense to assume that they are biased?

In the tug of war between the US and China, have you ever read a single publication from 中国证券报 or 上海证券报?

It is like when your two children are having a fight, you only listen to the explanation from one child.

I bet even many financial commenters, analysts and fund managers can’t fathom this too. It is not because they are not smart enough, but the foundation of our financial system is built on America’s framework. The way they look at the stock markets are probably taught by CFA Institute and most economic models are developed by the America academia.

Just google how the westerners comment the recent movie “Crazy Rich Asian”, you will see how much misunderstand the Americans have towards Asian.

I won’t go into the technical details. But think about the America stock markets as a playing ground for the university academia, statisticians and even physicians, while China’s stock markets are played by comrades, technology nerds and gamblers. It may not be a perfect analogy, but you got the point. They are fundamentally and structurally different.

That is why, we as an Asian investor, cannot just copy and paste the American way of investing.

Warren Buffett Isn’t God

Even if you don’t invest. You probably know Warren Buffett, one of the most successful investors in the world.

It is ironic that both “active investors” and “passive investors” think Warren Buffett is on their side.

Value investors (active) tell you that you should learn from Buffett to buy “value” stocks when the company are undervalued

“We won it in another way by being wired in a certain way, which we had nothing to do with, that happens to enable us to be good at valuing businesses.

Is that the greatest talent in the world? No. It just happens to be something that pays off like crazy in this system.”

Have you wondered why when the “financial experts” always talked about The Great Depression in 1926? Because that was the only long period of real US stock market crash in the past 100 years!

Source: Macrotrends.com, Grey area refers to the years of recession in America

In the past 90 years, other parts of the world are having wars, political unrests and many other major economically disruptive events.

That is why the investment strategies such as “buy and hold” or “index investing” were popularised because it worked, in US markets. The fact is that “Sell when others are greedy and buy when others are fearful” are easier said than done.

How well did Warren Buffett “beat the market” is commonly measured by the outperformance of his company Berkshire Hathaway versus S&P 500 index.

You can see that the outperformance mainly happens in the earlier years in the 1970s and the excess returns were declining over the years.

I wonder if you have the same knowledge, skills of Warren Buffett, will you be able to make the same fortune in Asia’s market.

The Demise of the King of Bonds

I talked about Warren Buffett because most of you are familiar with his name. If Warren Buffett is the “Oracle of Omaha”, Bill Gross of the “King of Bonds”.

Through this legendary Pimco Total Return Fund, he turned every $100,000 invested with him to $400,000. It means an average compound rate of return of 5.3%, for a bond investment! (It is ok if you think 5.3% is not impressive, it is simply because you are not familiar with bond investing)

Bill Gross’s spectacular performance was during near two decades of reducing interest rate (1988 to 2013). During this period, most bond funds were doing well.

By the time when Bill Gross started his new fund (2014), the interest rate started to rise, the bond price started to fall and even defaulted. Some of the Singapore investors learned the painful lesson from the bond default of Swiber and Hyflux.

The Great Rotation = Wealth Redistribution

Why am I spending so much time to talk about Warren Buffett and Bill Gross? I don’t deny that both men are genius extremely smart in their own field, but they can’t cook when there is no rice.

Because the Americans have enjoyed the boom super cycles for both stock and bond investments, which is the foundation of their personal wealth and retirement funding.

We Asian never really enjoy these despite working harder in the past 50 years.

I dare to say that the macro environment is shifting today and it is one of the most difficult periods of investing in the past decade. And it is also a tipping point for the wealth to re-distributed among the rich and poor.

Let’s go back to my earlier question, what would you invest if you can fly back to 2009? Would you still be panic and sell everything because “the depression is coming” or would you make some smart decisions?

Why do we invest?

If you saw your neighbour has made a great fortune through stocks or property in the past decade and you are afraid of missing the boat, you need to be careful.

Let’s face it, you have already missed the boat and you can’t go back. But you can catch the next one if you choose it wisely.

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in the corrections themselves. – Peter Lynch

How to Invest as a Singaporean or Asian

I will use a Singapore based investors as an example, but it is similar if you are in other parts of Asia.

From a Singaporean’s perspective, here is what has happened in the stock markets year to date.

We haven’t seen such a diversion in major stock markets for years.

If you invest in US stocks (the red line represented by S&P 500 index), you made more than 10% before the last month’s crash

If you invest in Chan stocks (the blue line represented by Shanghai Stock Composite Index), you lost more than 25%

Singapore stocks (the green line represented by Straits Times Index), you lost 10% by now

Now I add one more red line B which is the GMC portfolio that I am managing for myself and my clients.

It is counterintuitive, but the battle this year is not to make an excess return but to preserve capital. And now you need to ask yourself this question. If you are Temasek or GIC (our Singapore sovereign fund manager) and sitting on billions of dollars, where would you put your money?

Would you put your money in the US, Singapore or China?

From my observation, money is already flowing into China stock markets. And it is a natural thing. If the run in the US is over, the smart money has to find someplace to park.

The table below shows despite the crash, China ETF received the largest INFLOW next to the US this year.

And China is not only the place where you can put your money. The smart money is moving at lightning speed now. Take a look at the Brazil market and Indonesia markets, both run up more than 10% in the past month.

Despite sitting in Asia, you need to be a global investor, and it is so easy to achieve it today with modern technology. When the financial storms are coming,

The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails. – William Arthur Ward

]]>https://www.sgmoneymatters.com/how-to-invest-us-china-trade-war/feed/413279https://www.sgmoneymatters.com/how-to-invest-us-china-trade-war/Endowment Plan: China Life Special SaveGrowth Offers 2.6% Guaranteed Yieldhttp://feedproxy.google.com/~r/SingaporeMoneyMatters/~3/ndwFrcSPQaw/
https://www.sgmoneymatters.com/endowment-plan-guaranteed-return-china-life-special-save-growth/#commentsMon, 15 Oct 2018 00:36:54 +0000https://www.sgmoneymatters.com/?p=13232If you have extra cash in the bank, you want your money to work harder for your retirement. But if you are not comfortable with investing and yet not satisfied with the low interest of the bank deposit, you may want to put it in a short-term endowment plan. Single premium endowment plan becomes so […]

]]>If you have extra cash in the bank, you want your money to work harder for your retirement. But if you are not comfortable with investing and yet not satisfied with the low interest of the bank deposit, you may want to put it in a short-term endowment plan.

China Life is launching a new plan called “Special SaveGrowth”. The plan is simple: you pay a single premium and the plan matures in 5 years.

Your guaranteed Yield at maturity is:

2.38% if your Single Premium is less than SGD50,000

2.60% if your Single Premium is SGD50,000 or more

Note the return is compounded, minimum premium is $20,000. The policy term is longer than NTUC Capital Plus thus the yield is higher. 2.6% is probably the highest in the market now.

The policy illustration per $10,000 premium is shown below.

Some people may not be familiar with China Life insurance, but they are not new in the market. In fact, China Life Insurance (Group) Company is ranked 42nd in Fortune Global 500 List 2018. China Life has a niche in 5 years endowment plan. Their SaveReward endowment plan launched last year was a huge success.

]]>https://www.sgmoneymatters.com/endowment-plan-guaranteed-return-china-life-special-save-growth/feed/213232https://www.sgmoneymatters.com/endowment-plan-guaranteed-return-china-life-special-save-growth/Endowment Plan: NTUC Capital Plus New Tranche Offers 2.15% Guaranteed Return (CPN36)http://feedproxy.google.com/~r/SingaporeMoneyMatters/~3/zSAyxTuguBA/
https://www.sgmoneymatters.com/endowment-plan-ntuc-capital-plus-cpn36/#respondTue, 02 Oct 2018 03:36:47 +0000https://www.sgmoneymatters.com/?p=13204NTUC Capital Plus is a very popular short-term savings plan in Singapore with Guaranteed interest. The insurer NTUC INCOME has just launched a new tranche CPN36. This tranche is a 3-year non-participating, single premium endowment plan Guaranteed returns of 2.15% p.a This plan also provides protection against death, and total and permanent disability (TPD) during […]

Higher Return than Singapore Savings Bond

This product is comparable to Singapore Savings Bond. The latest offer by Singapore Savings Bond (SSB) has only an average simple interest of 2.05% if you hold it for 3 years. So if you invest $10,000 into SSB, you will only get back $10,616 after 3 years.

Source: http://www.sgs.gov.sg/

Limited Tranche, First Come First Serve

As Capital Plus (CPN36) is a limited tranche product and it is very popular among Singaporeans, the acceptance of the application is on a first-come-first-served basis. The product will be withdrawn upon attainment of tranche size. Any excess premium received above the tranche size will be refunded accordingly to customers.

Based on previous tranches, we should see the product to be sold off in a few days’ time.

Update: On the first day of the product launch on 2nd Oct 2018, NTUC Capital Plus CPN36 has been fully subscribed. If you want to be updated for such products in the future, subscribe to my mailing list via the form below.

]]>https://www.sgmoneymatters.com/endowment-plan-ntuc-capital-plus-cpn36/feed/013204https://www.sgmoneymatters.com/endowment-plan-ntuc-capital-plus-cpn36/How to Invest Your SRS Account: The Complete Guidehttp://feedproxy.google.com/~r/SingaporeMoneyMatters/~3/pKV-b8Pk3PE/
https://www.sgmoneymatters.com/srs-account-investment-options/#respondTue, 25 Sep 2018 01:57:06 +0000https://www.sgmoneymatters.com/?p=13174Supplementary Retirement Scheme (a.k.a. SRS) is not strange to most Singaporeans. It is a deferred tax scheme which helps you save for the future while reducing your tax expenses now. If you are mid to high-income earners, SRS is a great way to save tax in addition to CPF top-up tax relief. For example, if […]

]]>Supplementary Retirement Scheme (a.k.a. SRS) is not strange to most Singaporeans. It is a deferred tax scheme which helps you save for the future while reducing your tax expenses now.

If you are mid to high-income earners, SRS is a great way to save tax in addition to CPF top-up tax relief. For example, if your tax bracket is 15% and you contribute $10,000 to SRS, your personal tax is reduced by $1,500.

The problem is that many people are overjoyed with the tax savings and they stop there. Do you know SRS interest rate is only 0.05% for funds idling in the account? Your one-time tax savings will be eroded over the years by inflation.

How can you enhance the return of your SRS funds? What instruments can you invest using SRS? In this article, I will explain to you what SRS investment products and options are there.

To enjoy the tax savings, you need to open an SRS account with one of the local banks, i.e. DBS, UOB and OCBC.

You Don’t Have to Buy What the Bank Sells

Recently, one of my clients opened SRS investment account at a local bank. Somehow the relationship manager gave him the impression that he must use his SRS to buy one of the unit trusts from the bank to enjoy the tax savings, and he ends up paying a hefty sales charge for that!

The truth is that you don’t have to. There is a wide range of options that you can choose from. I will talk about it later.

Should You Invest Your SRS Funds?

Definitely!

Contributing SRS and leave it uninvested is like buying a new car and leave it in the carpark. You get a one-time delight of owning a shiny gadget, but the car is worth less every day.

Unfortunately, many people are not aware of how they can enhance the return of their SRS funds. According to an article from the Straits Times, 32% of $5.97 billion SRS funds are lying idle as cash. That is more than $1.9 billion of Singaporeans retirement funds.

Why you should invest your SRS money?

Potential higher returns: if you leave your SRS money with 0.05% deposit return, you are not taking care of your own retirement. Even if you leave it to a time deposit or an insurance policy, you earn multiple times higher return. Besides, you can invest in funds, ETFs, shares and REITs. Since you have a long investment time horizon, it is not difficult to earn a reasonable return.

Non-taxable investment gains: Any gains realised on your investments are not subject to income tax before withdrawal. Singaporeans sometimes take this for granted. But for many foreigners, this is dreams come true.

Ability to withdraw SRS in the form of investment: If you have accumulated a sizeable investment portfolio, you may not want to sell them when you retire. The good news is that, from July 2015, SRS members can withdraw an SRS investment by transferring the investment out of their SRS accounts, without having to liquidate them.

What Can You Invest Using Your SRS Funds?

You can’t use SRS to buy property. But the Government has few restrictions on SRS investments and there is a wide range of financial products approved under the SRS scheme, including:

Fixed Deposits

Bonds

Single Premium Insurance

Unit Trusts

Index funds and ETFs

Shares

Real Estate Investment Trusts (REITs)

I will go deeper into this.

If You Are a Conservative Investor

Investing can be intimating to first-time investors. But you don’t have to jump to the wagon straightaway.

The other advantage of an insurance plan is that such plans are protected under the Policy Owner Protection scheme. If the insurer goes bust, up to $100,000 guaranteed benefits are protected.

Ministry of Finance has set some conditions for an insurance plan to be eligible for SRS:

Only single premium products are allowed (including recurrent single premium products, encompassing both annuity and non-annuity plans)

Life cover (including total and permanent disability benefits) will be capped at 3 times the single premium

Plans can allow for a contribution continuation feature/benefit upon disability.

Other types of life insurance e.g. critical illness, health and long-term care are excluded

Trust nomination is not allowed for life insurance products purchased using SRS funds.

If you have more questions about these plans, leave your comment below and I will answer them.

Single Premium Annuity (Lifetime Payout)

If you want to receive a lifetime payout instead of a defined payout period, you can consider annuity plans. The annuity options in Singapore are very limited. There are only a few plans available now.

Tax Consideration When Using SRS to Buy Insurance

You should not forget SRS is not a tax exemption scheme, but a tax deferment scheme. It means when you receive your insurance payout when you retire, you could be subject to income tax.

The insurance need not mature at the prescribed retirement age. But if you purchase a life annuity, you will be taxed on 50% of the total annuity payouts each year, for as long as the annuity payouts are received.

Currently, you have up to 10 years to withdraw your SRS after statutory retirement age or the date of first withdrawal. You should also take note that you are not allowed to surrender an annuity policy after the SRS account has been closed or deemed closed.

If your SRS account is still open, your monthly annuity payouts must be returned to the SRS account before you withdraw them. If your SRS account is closed, your monthly annuity payouts may be paid into your bank account directly.

If You Want a Higher Return

There are a few limitations if you use SRS to buy insurance

You must purchase a single premium product. It means you need a big capital outlay to have a reasonable payout

You have no flexibility to change the payout structure once it is set

Your rate of return is not as attractive

Typically, the insurance option is more suitable for a person who is approaching retirement age and has a substantial amount in their SRS. If you are just starting to contribute SRS, you should consider investing.

SRS investment is a big topic which I will just touch briefly in this article. Feel free to leave your questions below and I will talk about them in more details in the future.

Unit Trusts for SRS

If you just open your SRS account, the bank relationship manager will show you a few “approved” funds. What they show you are just the funds distributed by the bank.

Stocks and REITs for SRS

You can also choose to invest stocks using your SRS funds.

To do so, you need to contact your stock broker to update your SRS Investment bank account details. After the linkage has been established, you will need to select the option “SRS” under “trade type” to conduct an SRS stocks trade. Please note “Contra” is not available for SRS trades.

Individual stocks and REITs are subject to corporate actions, and it can get quite complicated when you are not investing with cash.

For example, if a company issue rights, you need to top up to prevent your shares from being diluted, but you may not have enough SRS balance or you may not be able to top up if you have maximized the yearly limit of SRS contribution.

Nevertheless, if you really want to invest in shares, there are some options available.

Some brokers will handle the corporate actions (though not in a perfect way) for you, you need to check the terms of each investment account. Also, bear in the mind the brokerage fee is not attractive for small investment accounts.

My opinion? Most retail investors are better off to invest in funds and ETFs using SRS account.

Tax Considerations When Using SRS to Invest

Earlier on, I highlighted the tax issues of using SRS to purchase insurance. If you use SRS to invest, all proceeds from the sale of your SRS investments will be returned to my SRS account. The tax will be imposed on the amount subsequently withdrawn from the SRS account. The amount in the SRS account will be deemed to be withdrawn immediately after the end of the 10-year withdrawal period, and 50% of the balance will be subjected to tax.

How about dividends?

Generally, shares and unit trusts in Singapore adopt one-tier exemption system. It means dividend distributions from unit trusts and shares purchased with SRS funds and deposited into the SRS account are not taxed.

How to Get Started with SRS Investment

We have covered a lot today. It may sound hard for you to grasp all these options. But one thing is for sure, you should not leave your SRS account idling.

]]>https://www.sgmoneymatters.com/srs-account-investment-options/feed/013174https://www.sgmoneymatters.com/srs-account-investment-options/All About Medisave-Approved Integrated Shield Planshttp://feedproxy.google.com/~r/SingaporeMoneyMatters/~3/7k-COYsX9r8/
https://www.sgmoneymatters.com/private-integrated-shield-plan/#respondThu, 13 Sep 2018 08:40:00 +0000https://www.sgmoneymatters.com/?p=12743In Singapore, basic health insurance needs are covered under the CPF Medishield scheme, you can upgrade your basic Medishield Life to private insurers for better coverage. These plans called private Integrated Shield Plans (IPs). In this article, I will explain what Medishield Life is and how the integrated shield plans work. What is Medishield Life It was called MediShield, […]

In this article, I will explain what Medishield Life is and how the integrated shield plans work.

What is Medishield Life

It was called MediShield, which was a basic medical insurance scheme designed to help with large hospitalisation bills as well as certain outpatient treatments at approved medical institutions. It targets Class B2 and C wards and subsidised treatment in public hospitals.

In 2013, Medishield was revamped and renamed as Medishield Life. It is now a compulsory healthcare insurance scheme which covers all Singapore citizens and permanent residents for life.

What if you want better treatment in a private hospital or single bedded ward in a government hospital? You can upgrade your plan to Medisave-approved Integrated Shield plans offered by private insurers.

What is Medisave-Approved Integrated Shield Plan

The Integrated Shield Plans provide you with additional benefits and coverage when you opt for Class A and B1 wards in the restructured or private hospitals. Currently, there are 7 insurers approved now.

If you are not sure if you have an Integrated Shield Plan, follow the steps below to find out. Remember to have your SingPass ready!

How Integrated Shield Plan works

An additional private insurance coverage portion run by private insurers, typically to cover Class A/B1 wards in public hospitals or private hospitals.

In the event of a claim, you will be either compensated by MediShield Life or your private integrated plan, there is no duplicate coverage. Behind the scene, a patient submits claims directly to their private insurer through the hospital. Their private insurer will then sort out all arrangements with MediShield Life.

Note MediShield Life will cover you for life, including your pre-existing conditions. This is the case even if your pre-existing conditions are not covered under the additional coverage from your private insurer.

Integrated Shield Plan Premium

The private IP insurers act as a single point of contact for IP policyholders, even though they work with CPF Board back-end for premium collection.

Medisave can also be used to pay for premiums of these private Medisave-approved Integrated Shield plans. From 1 Nov 2013, the Medisave withdrawal limits for Integrated Shield plan are:

$800 per policy, per year, for those aged 65 and below next birthday;

$1,000 per policy, per year, for those aged 66 to 75 next birthday;

$1,200 per policy, per year, for those aged 76 to 80 next birthday; and

$1,400 per policy, per year, for those aged 81 and above next birthday.

You will also receive subsidies for the MediShield Life portion of your integrated plan if you are eligible.

There are 8 things you need to know about Integrated Shield Plans

For more updates of these Medisave-approved Integrated Shield Plans, click the link below:

What are Deductible and Co-Insurance

To better understand how to make a Shield Plan claim, you should know these two terminologies.

The deductible is the fixed amount payable by the insured each policy year (the year following his policy renewal month) before the MediShield Life payout kicks in. The deductible is payable only once every policy year. It helps to sieve out small claims, which can be paid using Medisave and/or cash, and helps to keep premiums affordable.

The co-insurance is a percentage of the claimable amount which you have to pay, on top of the deductible. The larger the bill, the lower the co-insurance payable.

You used to be able to purchase a rider from the private insurers to cover the full amount of deductible and co-insurance. But under the new rule from March 8, 2018, you have to pay at least 5% co-insurance for any new integrated shield plan.

How to compare the services between the private insurers

Claims Processing Duration

Ministry of Health periodically updates the claims return rate table which shows how long it takes each insurer to process Integrated Shield Plan (IP) claims with positive payouts.

With the modern technology and integration, nearly all insurers can settle the claim within a day. Please note you must inform the hospital that you have a private shield plan when you register.

Letter of guarantee and medical records costs

When you are hospitalised, if your hospital can obtain a letter of guarantee from your insurer, you can reduce the amount of your upfront payment to the hospital. A letter of guarantee is an assurance of payment offered by insurers to hospitals, on behalf of a patient, for the portion of the hospital bill covered by insurance.

To process claims, insurers may require your medical records. Either you as a claimant, or your insurer can request medical records from medical institutions. This request, however, usually comes at a cost from $75 to $250. Note your insurer may not absorb the cost of obtaining medical records.

How to compare the Private Integrated Shield Plans

With 7 insurers providing integrated shield products, it may be difficult to compare. Luckily the benefits and premiums are public information and we can do a side by side comparison.

]]>https://www.sgmoneymatters.com/private-integrated-shield-plan/feed/012743https://www.sgmoneymatters.com/private-integrated-shield-plan/Investment Pitfalls: How Anchoring Bias Leads You to Bad Investment Decisionshttp://feedproxy.google.com/~r/SingaporeMoneyMatters/~3/VwSrkxQs_Kw/
https://www.sgmoneymatters.com/behavioral-finance-anchoring-bias-investment-pitfalls/#respondWed, 12 Sep 2018 02:05:04 +0000https://www.sgmoneymatters.com/?p=13108What makes a good investor? Legendary investors such as Warren Buffett or Peter Lynch may be the first person who comes to your mind. It is hard to argue against their success, but I wonder how many retail investors (even the professional ones) have the same discipline, focus and patience to stay the course through […]

If this is the only bad trait that we were born with, it is not so bad. The problem is that we have a lot of behaviour bias that will lead us making illogical investment decisions and losing money. In the investment world, It is a widely studied topic called behavioral finance. Today I am going to talk about one of the most prominent one, “anchoring”.

What Is “Anchoring”?

“Anchoring” refers to the tendency that you attach your thoughts to a reference point, even though it may have no logical relevance to the decision at hand.

To explain this, let me tell you a story of mine.

When I was 22, I went on a holiday with my friends in Macau. Considering myself a “rational person”, I decided to try my luck at the Casino on the last day of the trip.

I did not go unprepared. I chose a simple game with a high probability of winning game, “Sic Bo”.

The rule was simple, three dices were rolled, and you bet “Big” or “Small”. If the sum of the three dices was between 4 to 10 and you bet “Small” for $100, you get back $200. If the total number is between 11 to 17 and you bet “Big” for $100, you will also get back $200.

There were other variations of the game, but I chose to just play this Big/Small game. Because Mathematically, I had a winning chance is 48.61% (see the explanation here). Since I had HKD700 left, I decided to bet only HKD100 every time.

My plan was that since I have nearly a 50% chance to win, I can play many hands and end up winning a bit or losing a bit. And I could walk away with all the thrills and fun without losing my pants. Good plan, right?

Here we go,

I bet “Small”, it opened “Big”;

I bet “Small” again, it opened “Big” again;

I bet “Small” again, it opened “Big” again;

I bet “Small” again, it opened “Big” again;

Then I started to think…

If you were me, what would you bet next? Big or Small?

I know, you must be thinking the same as me. After all, what is the chance for it to have 5 straight “Big”?

And yes, I bet “Small” with HKD300 and lost my last dollar on that day.

It was only after I calmed down that I realized that each result was an “Independent Event”.

Mathematically, the past 4 straight “Big” had no effect to the result of the 5th bet. The chance for the 5th result to be “Big” was still around 50%!

Well, it may sound counterintuitive, it is why the Casino like to show the past results prominently. By anchoring you to a situation like that (5 Big in a row), It gives you an illusion and overconfidence that you next bet has a better chance (betting more aggressively).

Anchoring Amplifies When Money Is at Stake

We anchor all the time because we need some reference point.

When you change jobs, do you want to be paid higher than your current salary? When you sell your house, do you want to sell for more than the price you paid?

But if you realize “anchoring” does more harm than good when it comes to money, you need to be very careful. Many people make big money mistakes based on irrelevant figures and statistics.

Let me share you another story.

When I was at a Karaoke party not long ago, a friend suddenly shouted, “Is it real? did Facebook’ stock just drop 20%? It is a golden opportunity to buy this stock now!”

The other friend agreed, “Yes, it was much higher price yesterday, I am in too”.

Within a few minutes, both bought the shares using their mobile app. I was shocked to see how fast the decisions were made based on the reason that the price was “discounted”.

In the next few days, I received a few calls from my clients asking if they should buy Facebook stocks because it is “ON SALE”!

I am not here to debate whether Facebook is a good stock to buy, but the market spoke for itself. As you can see from the chart below, Facebook’s stock price continued dropping after that.

In the above example, my friends made the buying decision because they were “anchored” to the stock price of Facebook on the previous day. When it was opened at $174+ on the next day, it looked “dirt cheap” and undervalued.

The truth is, $217.50 on July 26 2018, was a past price and when the new price opened with 20% down, it reflected the fundamental has changed. You cannot use the past information to make an accurate assessment for the future. When you bought the share believing the stock is still worth $217.50, you became the victims of the anchoring phenomenon.

Anchoring Bias Leads You Overpay for Your Property

When you buy a property, your negotiation price is commonly “anchored” by the asking price from the seller or the last transacted price of a similar property.

In my article about property investment, I have explained that the successful property investors don’t pay the “ask price”. They have a weighing machine themselves and they will only make a deal if their price is reached, which I call “Insane discount”.

Anchoring Bias Makes You Keep Your Losing Investments

Anchoring not only affects your buying decision but your selling decision as well.

It is very natural for people to use a purchase price as a reference point to make a future decision.

If you bought a stock for $100, and it suddenly dropped to $80. What would you do? Would you be able to accept the loss or wait and hope the stock price “comes back”?

If you think about it rationally, the price you purchased the stock has no influence over the future stock price. Your decision to buy, hold or sell the stock at a loss should be based on the assessment of the market outlook and specific challenge which company is facing.

You may have some gold bars or gold coin in your house, and you may have bought in 2011 when the gold price was at a record high, and you are not alone. However, if you anchor at the purchase price and wait for the recovery, you are still losing nearly 40% after 7 years holding the gold.

How to Minimize the Damage That Anchoring Does to You

You can avoid anchoring, it is in your genes. And it is not all bad. By anchoring our current status and always working towards a better self is how human get evolved to a modern world today.

But when it comes to personal investment, you need to engage in the rigorous critical thinking process. It’s best to be careful about the “fact” you utilize to evaluate, always fathom what you believe true may not be true. You need a systematic way to evaluate each scenario derive the truest picture of the investment landscape at hand.

Seeking a Second Opinion

In Ray Dalio’s famous book the Principles, he urges people to seek thoughtful disagreements. If you have a portfolio, show it to an investment professional who does not have the same emotional attachment to your investment choices.

It may be hard to admit that you are wrong by yourself, but having such an evaluation may unveil the blind spot that you never realize by yourself.

As a licensed investment adviser, I offer a non-obligatory meeting to review your existing stock investment portfolio. If you want a second opinion of the stocks and funds that you are holding, simply submit your request using the form below.

]]>https://www.sgmoneymatters.com/behavioral-finance-anchoring-bias-investment-pitfalls/feed/013108https://www.sgmoneymatters.com/behavioral-finance-anchoring-bias-investment-pitfalls/3 Fundamental Indicators That Every Stock Investor Should Knowhttp://feedproxy.google.com/~r/SingaporeMoneyMatters/~3/x6bK4NDBWu8/
https://www.sgmoneymatters.com/stock-fundamental-indicators/#respondMon, 27 Aug 2018 07:06:26 +0000https://www.sgmoneymatters.com/?p=13081There is a myriad of ways that an investor can approach stock picking. Some people prefer to find hidden gems by going through a company’s balance sheets, others prefer to rely on price chart analysis. Yet another class of traders may be value-based investors. In this article, we will be focusing on a fundamental based […]

]]>There is a myriad of ways that an investor can approach stock picking. Some people prefer to find hidden gems by going through a company’s balance sheets, others prefer to rely on price chart analysis. Yet another class of traders may be value-based investors. In this article, we will be focusing on a fundamental based stock selection methodology.

Regardless of your personal preference, there are three important Fundamental Indicators which are essential to successful stock analysis and investing. They include

Price to Earnings Ratio (P/E Ratio)

Price to Earnings to Growth Ratio (PEG)

Price to Book Ratio (P/B ratio).

What is Fundamental Analysis

Before we discuss the three major fundamental indicators that every stock investor should be familiar with, it is essential to understand what the core principle of fundamental analysis is.

Fundamental analysis, as it pertains to the valuation of stocks, is an analytical method that incorporates publicity available data on a company’s revenue, growth prospects, earnings, net profit margins, and other relevant data to assess the viability of purchasing or selling short shares in a specific company. Fundamental analysts typically believe that these data points are the most important in the determination of the intrinsic value of a company.

Contrary to fundamental analysis is technical analysis, wherein the analyst focuses on historical price data, volume and other technical indicators to determine the intrinsic value of a stock. Technical analysts believe that all publicly available information is already priced into the stock, and as such, the price charts provide the best clues for the future direction of that financial instrument.

Though there are some traders and investors that combine both fundamental and technical approaches into their investing decision processes, these two schools of thought tend to compete with each other and most market participants typically gravitate toward one or the other.

Price-to-Earnings Ratio (P/E Ratio)

The price to earnings ratio (P/E ratio) is the first important indicator that we will discuss. The P/E ratio is a simple but powerful metric for assessing the relative value of a stock by comparing its stock price with its current earnings. Essentially, the P/E ratio calculates the price the stock investor is paying per $1 of the company’s earnings.

P/E Ratio = Share Price / Earnings per Share

For example, if a company is reporting an earnings per share of $ 2.50 and the currently traded stock price is $50 per share, the P/E ratio would be calculated as $ 50 / $2.50 = 20. So, in this example, the Price to Earnings ratio would be 20. The beauty of the P/E ratio, if you implement it properly, is that it helps keep you grounded and less prone to being swept away by manias or hysteria in the market.

There are a few keys ways to use the P/E ratio in your analysis. But the way that I find it most useful is by utilizing it for comparing companies that are in the same sector or industry. So, for example, if you want to add a stock in your portfolio that is within the Consumer staples sector, the you could compare P/E ratios of those companies within that sector to find a potential stock that best meets your valuation criteria. It is important obviously to consider other factors as well, but all things being equal, the stocks with the lower P/E would be a more attractive buying opportunity.

PEG Ratio

Although the P/E ratio is typically the most widely used indicator when trying to assess the value of a stock, it does have its limitations. One obvious limitation is that is fails to take into account the company’s future expected growth.

The PEG Ratio helps solve this shortcoming of the PE ratio since it directly takes into account the future projected growth rate of a company.

Below you will find the calculation for PEG Ratio:

PEG ratio = P/E ratio / Earnings Growth rate

Let’s take an example to better illustrate how the PEG ratio works.

Assume you have narrowed down your selection process to two technology stocks. You have determined that Stock A has a PE ratio of 30 and Stock B has a PE ratio of 40. You want to consider the future growth prospects of each company before making a final decision. So, you take this one step further and compare each stocks PEG ratio now.

Assume that Stock A has an expected 3 year growth rate of 15% while Stock B has an expected 3 year growth rate of 25%.

Which is a better buy from the PEG standpoint?

Well, let’s plug in the numbers:

Stock A PEG = 30 / 15 = 2

Stock B PEG = 40 / 25 = 1.6

So even though Stock A has a lower P/E ratio, Stock B which has a lower PEG ratio, is a better value based on expected future growth.

Now the PEG ratio is not foolproof either. One of the most obvious problems that can arise from using it is that it is based on assumptions about the future growth of the company, which may or may not materialize.

Price-to-Book Ratio (P/B Ratio)

The last metric that we will discuss is called the Price to Book Ratio. Essentially the Price to Book Ratio measures the value per share over or below the company’s current asset value. The P/BV ratio is computed by dividing the price of a stock by its book value on a per share basis.

P/B Ratio = Price / Book Value

Let’s take a look at an example:

Assume that a company has $50 million in assets and has $10 million shares outstanding. This would mean that the book value is $ 5 per share. If each share of stock in that company is currently traded at $10, then the Price to Book Ratio (P/BV) would equal 2.

Investors should use the P/BV as a guide only, and look at the figures on a relative basis. For example, You could compare a company’s current P/BV to its P/BV 1 year ago, 3 years ago, or some other duration. In additional, you may consider comparing the P/BV of stocks within similar sectors as a valuation method. But keep in mind that P/BV used in isolation may not be that telling. It should always be used in a relative sense.

Summary

Now, that we have taken a look at all three of these important fundamental metrics, I encourage you to apply these indicators in your stock selection process. By doing so, you will find a good balance between value and growth in your stock portfolio.

This article is contributed by Vic Patel. He is a full time trader, mentor, and financial market expect. He also runs a popular trading blog at Forex Training Group.